MasTec, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. MasTec provides infrastructure construction, installation and maintenance services across communications, oil and gas, electrical transmission, power generation and industrial markets, primarily in North America. Amounts below are in millions except per-share data.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $1,586.2 | $1,111.0 | $3,792.8 | $3,180.9 |
| Net income (loss) attributable to MasTec | $56.3 | $7.6 | $77.7 | $(2.3) |
| Diluted EPS | $0.69 | $0.09 | $0.96 | $(0.03) |
| EBITDA (non-GAAP) | $151.0 | $67.8 | $292.6 | $164.4 |
| EBITDA margin | 9.5% | 6.1% | 7.7% | 5.2% |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $127.1 | $260.6 |
- Q3 net income attributable to MasTec was 3.5% of revenue; nine-month net income attributable to MasTec was 2.0% of revenue. Costs of revenue, excluding depreciation and amortization, were 86.3% of Q3 revenue and 87.6% of nine-month revenue, versus 87.6% and 88.2% in the respective 2015 periods.
- Nine-month cash used in investing was $94.1, including $89.1 of capital expenditures. Cash used in financing was $27.6. Cash increased $4.4 to $9.4 at September 30.
- Working capital was $480.1, versus $377.2 at year-end 2015. Current assets were $1,422.4 and current liabilities $942.4.
- Total debt, net of deferred financing costs, was $1,016.7, including $66.1 current and $950.6 long-term, versus $1,010.3 at December 31, 2015. The company reported compliance with debt covenants. Revolver borrowings were $260.7; $458.8 of revolving borrowing capacity remained available.
Material changes and operating drivers
- Revenue rose 43% in Q3 and 19% for the nine-month period. Oil and Gas growth, led by large long-haul pipeline projects, and increased Communications demand were the largest contributors. Q3 Oil and Gas revenue rose 81%; Communications rose 22%.
- Management attributed improved cost ratios to Oil and Gas project efficiencies, favorable mix and better equipment and overhead utilization. Consolidated EBITDA improved materially; however, Electrical Transmission remained loss-making, with Q3 EBITDA of $(8.3) and nine-month EBITDA of $(42.0).
- Nine-month operating cash flow fell to $127.1 from $260.6, mainly due to working-capital investment as activity increased. Accounts receivable rose to $1,216.0 from $911.1 at year-end; management cited improved collections and DSO of 61 days versus 68 at year-end.
- Q3 and nine-month results included restructuring charges; the nine-month period also included a $13.5 Oil and Gas project loss, a $15.1 Electrical Transmission project loss, and a $10 settlement gain related to a previously acquired business. Other unusual items included $5.1 of losses on a non-controlled Canadian joint venture in both the quarter and nine-month period.
Outlook, risks and contingencies
- Management expected to realize approximately 30% of September 30 estimated 18-month backlog of $4,651 during the remainder of 2016. Backlog was down from $5,334 at June 30 and up from $4,562 a year earlier. Approximately 65% was under master service or similar agreements that generally do not commit customers to minimum purchases and may be canceled on short or no notice.
- Management estimated 2016 capital expenditures of approximately $110, or $100 net of disposals, and expected $30–$40 of equipment purchases under capital leases or other financing arrangements. It stated that available operating cash, credit capacity and cash balances should meet anticipated needs for at least the next 12 months.
- Customer concentration is significant: AT&T represented 30% of Q3 and 34% of nine-month revenue; Energy Transfer affiliates represented 35% and 26%, respectively. The top ten customers accounted for 80% of Q3 and 76% of nine-month revenue.
- Management’s Q3 goodwill review found Electrical Transmission reporting-unit fair value only about 5% above carrying value; lower profitability or cash flows could result in a future impairment charge.
- Estimated contract change orders and claims included in contract prices were approximately $29, subject to customer resolution. The company cautioned that ultimate recoveries may differ from estimates.
- A shareholder securities class action was dismissed without prejudice in September 2016, allowing plaintiffs to amend. The SEC had a formal civil investigation relating to previously disclosed accounting adjustments and an Audit Committee investigation; MasTec said it would continue cooperating. Management said it intended to defend the lawsuit, but outcomes remain uncertain.
- Other exposures include letters of credit, bonds, self-insurance liabilities, multiemployer pension plans and joint-venture obligations. The company was arbitrating whether any additional Central States pension withdrawal liability remained.
Important facts for investors to verify
- Whether the elevated revenue and backlog convert to profitable work, especially given the noncommitted nature of much of the backlog and concentration in major customers.
- Whether working-capital growth reverses and operating cash flow improves; nine-month cash flow was substantially below the prior-year period despite higher earnings.
- Progress and remaining costs from Oil and Gas and Electrical Transmission project losses and restructuring, and the Electrical Transmission segment’s limited goodwill valuation cushion.
- Resolution and collectability of contract claims and change orders, the securities litigation and SEC investigation, and the Central States withdrawal-liability arbitration.
- Debt and liquidity capacity after considering project-related letters of credit, including the company’s $109 of Waha JV equity-commitment letters of credit and expected future funding needs.